In the United States, owning a car symbolizes independence and flexibility. Despite the convenience, the cost of owning a vehicle can be a significant financial commitment. Whether it’s a basic model needing frequent repairs or a luxury car, the expenses can strain budgets. Yet, for many Americans, a car is a necessity for daily commuting, grocery shopping, and running errands in areas with limited public transport options.
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Wondering how much to spend on a car? The answer varies based on your income, lifestyle, and the importance you place on having a stylish vehicle. Check out these three methods to help you decide.
The ‘One-Size-Fits-All’ Rule: 35% of Your Income
Personal finance plays a pivotal role in effectively managing your finances. When contemplating the amount to allocate for a vehicle purchase, a widely accepted guideline recommends setting aside up to 35% of your annual income. For example, if your yearly earnings total $20,000, following this principle would lead to a $7,000 budget, enabling you to acquire a dependable used vehicle. On the other hand, an individual with a $150,000 income might consider investing $52,500 in a new car, granting access to a diverse array of options from various brands, including luxurious models. Nevertheless, due to the diversity of personal preferences and financial situations, it proves advantageous to establish spending categories tailored to individual requirements. Ultimately, the choice of which spending tier to opt for hinges on factors like your financial security, preferred payment mode, and the role of a vehicle in your overall expenditure structure.When it comes to budgeting for a new or used vehicle, there are many factors to consider. One of the most important is your income level. For example, if you have an annual income of $20,000, following the principle of spending 35% on transportation would leave you with a budget of $7,000. This could be enough to purchase a reliable used car that meets your needs.
On the other hand, someone with a higher income of $150,000 may have more flexibility in their budget and could potentially invest up to 35%, or $52,500, in a new car. This would open up a wider range of options from different brands and even allow for the purchase of luxury models.
However, it’s important to remember that your income is not the only factor to consider. You also need to think about other expenses such as rent or mortgage payments, utilities, groceries, and any outstanding debts. These should all be taken into account when determining how much you can comfortably spend on a vehicle.
Another important aspect to consider is the type of vehicle you need. Are you looking for a sedan for everyday commuting? Or do you require a larger SUV for family trips and hauling equipment? The size and type of vehicle will greatly affect its price, so it’s important to prioritize your needs and determine what features are essential for your lifestyle.
Additionally, you should also consider the long-term costs associated with owning a vehicle. This includes insurance, maintenance, and gas expenses. Different vehicles will have varying costs in these areas, so it’s important to research and compare before making a decision.
The Frugal Rule: 10% of Your Income
For many people, I think that will be between 10–15% of their income. So if you earn $25,000 a year, that’s going to be a high-mileage used car for $2,500–$3,000. If you earn $80,000, that’s a used car for around $10,000 or $12,000. (Yes, this is the harsh reality of being good with money.)
But here’s the thing: I’m not that frugal. I know that’s weird coming from a personal finance blogger, but I’ve always been honest about the fact that I’m more of a natural-born spender than a saver. I’ve checked myself in a lot of ways and become better at making frugal decisions, but I don’t have that passion for spending as little as I can at every turn (though I’m often jealous of those who do).
I also value cars. I enjoy driving and taking care of vehicles, so I’m willing to spend a bit more — without going overboard — on my vehicles. So, when it comes to buying a car, I have to balance my love for cars with my desire to be financially responsible.
If you’re in the market for a new car and are trying to stick to a budget, you may be feeling discouraged by the prices you see. It can seem like a used car that fits your needs and budget is impossible to find. But don’t give up just yet!
The Compromise: 20% of Your Income
To ensure optimal safety and reliability aligned with personal requirements, when considering a new vehicle purchase, priority is placed on these aspects. Particularly with a young family and two industrious working parents, the significance of reliability cannot be overstated — frequent visits to the repair shop would prove inconvenient.
The past two vehicles acquired were approximately two to three years old with an odometer reading of around 20,000 miles. While the relatively recent manufacturing of the cars contributed to their reliability, the reduced cost associated with buying used vehicles compared to brand-new options was also a significant factor.
Determining the affordability of a vehicle differs from determining an appropriate budget for a new car acquisition. When consulted, a financial analyst might indicate that your budget allows for a monthly payment of $650. Although this amount could potentially secure financing for a new Porsche with extended loan terms, it is advised against allocating such a substantial portion of your income to a vehicle purchase.
For individuals who prioritize frugality, allocating approximately 10–15% of your income is generally recommended. Conversely, those who value the dependability offered by a newer, albeit pricier, vehicle might consider setting aside 20–25% towards this endeavor.
Applying this guidance, a salary of $25,000 would allow for a budget of $5,000 to $7,500. Despite being a modest amount, this range expands the available options. On the other hand, an income of $50,000 could support an allocation of $10,000 to $15,000, a sum sufficient for acquiring a basic used sedan with mileage below 100,000.
But If You Really Love Cars…
To all you personal finance blog regulars out there, this probably sounds good so far. If this is your first time here (and assuming you’ve read this far), you might be thinking, “These people are so cheap! That’s crazy. There’s no way I can get a car I want for that money!”
To you, I would say ask yourself why you’re saying that. Is it because you’re a “car person” and you value your car most out of all your possessions? Or is it because you’ve simply been conditioned by our culture, advertising, and car salespeople to think that you should buy a brand-new car and there’s nothing wrong with spending a year’s worth of paychecks on a car?
If it’s the former — that you love cars — cool. There’s nothing wrong with intentional spending on the things you value most. By “intentional spending,” I mean spending money — maybe more than other people would think is sensible — on things that interest you.
So if you value your car, I don’t see anything wrong with spending more than we recommend, perhaps up to 50% of your annual salary on the purchase price of a car.
Chances are — as a car person — you’ll care for the car more, enjoy it more, and get more money for it when you sell it than the average car owner. Again, you just have to remember that because the car will be a large expense, you’ll have to be extra vigilant about other expenses.
Keep in Mind the Full Costs of Owning a Car
One thing to remember as you’re shopping for cars is that there are far more expenses than just the price you pay to drive it off the lot.
If you get an old beater, it may be cheap upfront, but then could cost you down the line in non-stop repairs. Alternately, you could fork over a chunk of cash to purchase a new car that comes with warranty protections.
Balance out the pros and cons of each as you’re shopping, and remember some of the other costs that will crop up later on, like:
- Maintenance — Think oil changes, tire balancing, filter replacements, even car washes.
- Repairs — Anything from a leaky transmission to engine failure.
- Registration — You’ll need to register and licence your vehicle for road use.
- Insurance — Depending on your driving record, how much insurance you want, and where you live, insurance costs could add up.
- Fuel — Which, as we’ve experienced all too well lately, ain’t cheap.
- Parking — That could be daily or monthly parking at your office or even paying for an annual pass to park on your home’s street.
The Bottom Line
If you’re not a car person, the takeaway is to think about why you think you should spend so much on a car. It’s easy to think that way, I know — I worked at a car dealership once.
If someone walked in and didn’t specify a budget, we’d sell them any car they wanted and only after the fact worry about whether they could afford it. And by “afford,” I mean that they could get financing approved. In some cases, I’m sure we sold cars that cost more than the customer earned in a year.
We didn’t care about the car buyer’s actual income or budget; it wasn’t the dealer’s business. If a customer can’t afford a car, the bank sends a repo man and gets the car back. The system looks out for everyone but you. Start looking out for yourself by figuring out how much you should pay for a new car and then stick to your guns.
